Incoming government may rush to return to surplus

Professor Neville Norman said he feared an incoming Coalition government may echo the mistakes of Cameron’s government in Britain. Photo: David Mariuz

Jason Clout

A Coalition government, if elected in September, could be tempted to move too fast to return the budget to surplus, echoing the mistakes of Britain’s Cameron government, warned University of Melbourne’s Professor Neville Norman.

He told the NAB’s post-budget breakfast function in Adelaide on Wednesday that an incoming government could rush to establish its economic credentials.

“There is every temptation for [shadow treasurer] Joe Hockey or whoever reads out the 2014-15 budget to slash and burn their way to an immediate surplus as there will be no election in sight,’’ he said.

“My fear is that they might do a Cameron government and overdo it.’’

Professor Norman accused the current Gillard government of having a “surplus fetish’’. That commitment to not run a deficit had proven economically and politically damaging, as he predicted last year, he said.

“Instead of listening at the time of the last budget, the Gillard government pronounced such warnings as academic . . . We now know the story, they dug in for months and in late December 2012 ate buckets of humble pie.”

He argued the Gillard government should have looked to boost revenue by lifting the GST rate from 10 per cent to 15 per cent.

Lifting income taxes, which includes the budget’s medical levy uplift, often only encourages people to seek ways to escape paying tax, he said.

Call for GST review

Managing partner of PwC’s Adelaide’s office, Scott Bryant, said it was time GST was reviewed. It might need to be broadened if government revenue was to be maintained.

“The problem is that much of the future increases in public and private expenditure is likely to be on health and education,’’ he said.

As GST was not charged in those areas, it could inhibit the fiscal plans of any future government.

“What governments have tended to do is compensate low-income earners,” he said, rather than have industries where no tax was imposed at all.

“We need to rethink the mix of taxes and that includes what happens with GST. It has to become a more sustainable model.”

Mr Bryant was disappointed with the Gillard government’s corporate tax changes. The premise for the consultations with business was that there would be a tightening in some areas, but that would be offset by a lowering of the corporate tax rate.

“It could be argued that there were allowances in business tax which did need changing,” he said. “But there hasn’t been the compensation of a lower corporate tax rate, which had been indicated at the outset of the reform process.’’

What it means for SA

From a South Australian point of view, alterations to mining exploration in the budget might make the state a less appealing option.

“We’re more of a fledgling resources state compared to some of the others. Anything which makes it less attractive to explore in South Australia could be a problem.

Higher infrastructure spending outlined in the budget was good news for SA, Mr Bryant said. “That is very welcome and is a key element for the state,” he said.

On international tax, the government has allocated $109.1 million over four years for the Australian Taxation Office to increase compliance activity. That will be targeted at moves which facilitate profit-shifting opportunities, according to PwC.

There have also been changes to exemptions for foreign dividends received by some Australian businesses in relation to interests in foreign companies. That revolves around whether the interest is classified as debt for Australian tax purposes.

Much of the discussion on personal tax has been focused on the decision not to raise the tax-free threshold from $18,200 to $19,400. The planned higher amount had been in part designed to assist consumers to afford higher energy costs under the carbon tax .

“Those energy costs may not rise as high as expected, so there is an argument they are not as necessary. But like other changes to personal tax, people do expect money to be coming to them when it’s been announced,” said Mr Bryant.

Taxpayers hit hard

Professor Norman, who has had a long-standing interest in the impact of personal tax, said the budget will have hit taxpayers hard.

“The move to retain the tax brackets and the marginal tax rates will hurt, as it always does.’’

Despite repeated requests for greater clarity, including a High Court challenge, the budget papers overall lacked detail, he said.

“Much of the technical documents are an apology for botching the revenue forecasts and some partial admissions,’’ said Professor Norman.

“They are still not fully honest and even through three out of seven judges agreed with a High Court litigant that Treasury needed to disclose fiscal drag estimates, they still won’t come clean,’’ he said.

“A transparent Treasury would give the full taxpayer distribution functions and all technical estimates. But they still haven’t .

“Nor is there a full risk-sensitive forecasting approach. Sensitivity to parameter variations is only part of what is needed,’’ said Professor Norman.

He did agree with changes to superannuation. Under the Howard-Costello government, the handouts had become too generous and Professor Norman supported their winding back.

“But the entire impact of the budget is over-shadowed by the spectre of a dying government struggling to explain and crawl out of its fiscal hole.